New Zealand's five biggest banks' earnings fell 10 per cent in the second half of last year despite lending growing at the fastest pace in almost four years.

According to a biannual financial analysis of ANZ, ASB, BNZ, Kiwibank and Westpac by PricewaterhouseCoopers, the sector generated earnings of $2.54 billion in the six months to the end of December, down from $2.7b in the first half of the year.

That was largely due to falling operating income and a rise in operating expenses, but the underlying businesses look sound, according to PwC.

The sector's losses on financial instruments increased by $216 million in the last 12 months to $396m - resulting in a 7 per cent decline in earnings from non-traditional bank revenue streams over the same period.

Similarly, the Reserve Bank's higher capital adequacy requirements were still being felt on balance sheets. In conjunction with IT upgrades, greater regulation and internal changes that caused operating expenses to rise by 5 per cent to $2.3b.

Meanwhile, net interest income, or earnings from traditional banking business, was flat in the second half of the year at $3.7b, with growth in loans - their first notable increase since the global financial crisis - offset by greater competition in the market.

The aggressive fight for market share in the period motivated banks to extend loans at rate below carded rates, a move that was exacerbated by the closure of the Nation Bank brand.

Demand for loans and better interest rates was not limited to the households, with corporates lifting their lending by 2.2 per cent to $106.5b.